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Cliff Wachtel
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Cliff Wachtel, CPA, is currently the Director of Market Research, New Media and Training for Caesartrade.com, a fast growing forex and CFD broker. He covers a variety of topics including global market drivers, forex, currency hedged and diversified income investing, and is currently working on a... More
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  • THREE DAYS, THIRTEEN REASONS YOU MUST DIVERSIFY YOUR CURRENCY EXPOSURE 0 comments
    May 23, 2012 5:27 PM

    If most of your assets are denominated in one or two of the most widely held currencies, it's time to be thinking about ways to hedge that exposure and diversify into assets denominated in or connected to currencies that aren't about to be threatened by massive, potentially inflationary money printing that risk killing purchasing power.

    Want proof? We need only look at what's happened in the first three days of this week.

    The following are paraphrased from seekingalpha.com's Global & FX Market Currents from May 21 to 23.

    May 21

    1. The Telegraph: Hollande, Monti, & Rajoy seek halt austerity
    2. ECB should buy unlimited amounts of sovereign debt if Greek exit from EMU-Polish finance minister Rostowski.
    3. Even EZ-wide deposit guarantee plan may not halt the Club Med bank run because depositor fear is less bank failure risk and more redenomination risk
    4. China may announce stimulus actions in the near future, reports official Xinhua News Agency

    May 22

    5. Jeremy Siegel: ECB's best hope of saving EMU is to trash the currency upon which it is built. A devalued EUR will bring some relief to periphery by boosting trade& pumping more inflation into German economy - a small price to pay to save the union. - A PRICE TO BE PAID BY ALL THOSE WITH SAVINGS PORTFOLIOS IN EUR, JEREMY!
    6. Speaking to reporters on the release of an IMF report urging the U.K. to print more money, agency head Lagarde calls for eurobonds.
    7. Fitch downgrades Japan to A+, outlook negative. "The country's fiscal consolidation plan looks leisurely relative even to other fiscally-challenged high-income countries, and implementation is subject to political risk."
    8. China to fast-track approvals for infrastructure projects to combat an economic slowdown, according to the state-backed China Securities Journal.

    May 23
    9. Dow Jones: Italy's Mario Monti has joined France's Hollande advocates eurobonds. If so, he would join Spain's Rajoy who has also offered guarded support for same and establish a solid bloc to counterbalance German opposition to jointly issued bonds. Given the limited support that German, Dutch, Finnish, and other funding country tax payers would be willing to offer, we suspect this debt would printed away.
    10. Eurogroup Working Group (NYSEARCA:EWG): Each EZ nation must prepare a contingency plan should Greece leave EMU. This is announcement is the first public admission of the possibility by an official EU body. Indeed, such talk was considered taboo for fear of leaks and ensuing panic. However with even the Greek PM admitting to the possibility, the topic is out in the open Among the elements to consider are what support the EU/IMF should give. With taxpayers of both EU funding nations and the US (IMF's chief paymaster) unlikely to be supportive, and the US in an election year, we suspect the funds will be printed rather than allocated from other programs or from spending cuts.
    11. Bank of Japan maintains monetary policy, leaving rates in the 0-0.1% band, keeping asset purchases level at a total of ¥70T ($880B). Analysts expect an increase in asset purchases to come soon. This means in essence more Yen printing to fund purchases of Japan bonds to keep their price up and yield (and so Japanese interest rates) low.

    Of course, these items are just from the past three days. There are more reasons, and more currencies, likely to face the threat of diluted purchasing power through excessive money printing that quietly taxes savers to fund spenders.

    12. It's well known that the Reserve Bank of Australia is in easing mode, and that the Fed is ready to begin more quantitative easing if needed.

    13. If the EU crisis starts to overheat, expect the Fed to take further measures to make more cash available to ease EU banking liquidity. Of course, the real cause of the EU's crisis isn't liquidity, its actual solvency. The short term liquidity crunch is just a symptom of the world refusing to lend to it because so many EU banks and governments may already be technically insolvent. Still, the Fed is likely to do as it did last year and at least ease liquidity problems in Europe to buy more time to avoid a likely market panic and collapse.

    It's possible that widespread money printing may help avoid recessions - but it's far more likely that it will kill ultimately reduce (possibly severely) the purchasing power of the above mentioned currencies.

    Yes, the so called coming "fiscal cliff" of an end to tax cuts and certain spending programs may reduce the monetary expansion in the US, but remember, this is an election year. It's unlikely any politician will want to hit voters' wallets before the November elections. We believe talk of fiscal responsibility will outweigh any real action on it.

    The key lesson here is that we all must diversify our liquid assets - here's the guide to the easiest, safest way to do it, The Sensible Guide To Forex. It shows how you can easily achieve this, without opening accounts all over the world, or engaging in the high risk, demanding kind of short term trading typically associated with forex.

    Click on this here for a description and here for advanced reviews.

    We don't have to accept whatever diluted currency Bernanke, Draghi, King, and other central bank heads decide to serve up. We can vote with our feet and wallets and move get more exposure to assets of nations that respect our rights to keep what we've earned and saved without imposing the stealth tax of excessive money supply.

    Does anyone know which firm(s) dominate the market for printing presses used to print currencies? The coming years should be great for those who manufacture, sell, and service the hardware behind the wave of loose monetary policy.

    Disclosure: no positions or plans to open new ones in any asset mentioned above in the coming days.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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